PRODUCTION AND QUALITY

MANAGEMENT
Session 4 : DEMAND FORECAST 2

Majda EL BOUKHARI. PH,D.

Professor

Academic year : 2023-2024

e.isiam.ma
Approaches to forecasting

• There are two general approaches to forecasting:

qualitative and quantitative.

• Qualitative methods consist mainly of subjective inputs,

which often defy precise numerical description.

• Quantitative methods involve either the projection of

historical data or the development of associative models
that attempt to utilize causal (explanatory) variables to
make a forecast.
Approaches to forecasting
(continued)
• Qualitative forecasts
• Qualitative techniques permit inclusion of soft information
(e.g., human factors, personal opinions, hunches) in the
forecasting process. Those factors are often omitted or
downplayed when quantitative techniques are used
because they are difficult or impossible to quantify.

• In some situations, forecasters rely solely on judgment

and opinion to make forecasts. If management must have
a forecast quickly, there may not be enough time to gather
and analyze quantitative data. At other times, especially
when political and economic conditions are changing,
available data may be obsolete and more up-to-date
information might not yet be available.
Approaches to forecasting
(continued)

• Qualitative forecasts
• Similarly, the introduction of new products and the
redesign of existing products or packaging suffer from the
absence of historical data that would be useful in
forecasting. In such instances, forecasts are based on
executive opinions, consumer surveys, opinions of the
sales staff, and opinions of experts.
Approaches to forecasting
(continued)

• Qualitative forecasts (cont’ed)

• There are 3 main qualitative approches to demand

forecasting (to shich we add some other approches) :

- Executive Opinions
- Salesforce Opinions
- Consumer Surveys
- Other Approaches
Using forecast information

• Quantitative forecasts
• Quantitative forecasts are usually based on time-series
data.

• A time series is a time-ordered sequence of observations

taken at regular intervals (e.g., hourly, daily, weekly,
monthly, quarterly, annually).

• Forecasting techniques based on time-series data are

made on the assumption that future values of the series
can be estimated from past values.
Using forecast information
• Quantitative forecasts (continued)
• Analysis of time-series data requires the analyst to identify the
underlying behavior of the series. This can often be
accomplished by merely plotting the data and visually
examining the plot. One or more patterns might appear: trends,
seasonal variations, cycles, or variations around an average. In
addition, there will be random and perhaps irregular variations.
These behaviors can be described as follows:

• Trend refers to a long-term upward or downward movement in

the data. Population shifts, changing incomes, and cultural
changes often account for such movements.
• Seasonality refers to short-term, fairly regular variations
generally related to factors such as the calendar or time of day.
Restaurants, supermarkets, and theaters experience weekly
and even daily “seasonal” variations.
Using forecast information

• Quantitative forecasts (continued)

• Cycles are wavelike variations of more than one year’s
duration. These are often related to a variety of economic,
political, and even agricultural conditions.
• Irregular variations are due to unusual circumstances such as
severe weather conditions, strikes, or a major change in a
product or service. They do not reflect typical behavior, and
their inclusion in the series can distort the overall picture.
Whenever possible, these should be identified and removed
from the data.
• Random variations are residual variations that remain after all
other behaviors have been accounted for.
Using forecast information
Using forecast information

• Quantitative forecasts (continued)

• There are so many quantitative forecasting approaches.

• We can name here :

- Naive Methods
- Techniques for averaging :
• Moving average.
• Weighted moving average.
• Exponential smoothing…
Using forecast information

• Quantitative forecasts (continued)

• Naive Methods :
A naive forecast uses a single previous value of a time
series as the basis of a forecast. The naive approach can be
used with a stable series (variations around an average),
with seasonal variations, or with trend. With a stable series,
the last data point becomes the forecast for the next period.
Using forecast information

• Quantitative forecasts (continued)

- Averaging techniques:

• Averaging techniques generate forecasts that reflect recent

values of a time series (e.g., the average value over the last
several periods). These techniques work best when a series
tends to vary around an average, although they also can
handle step changes or gradual changes in the level of the
series.

• a. Moving average:
A moving average forecast uses a number of the most recent
actual data values in generating a forecast. The moving
average forecast can be computed using the following
equation:
Using forecast information

• Quantitative forecasts (continued)

a. Moving average: (continued)
Using forecast information
• Quantitative forecasts (continued)

b. Weighted Moving average:

• A weighted average is similar to a moving average, except

that it assigns more weight to the most recent values in a
time series.

• For instance, the most recent value might be assigned a

weight of .40, the next most recent value a weight of .30,
the next after that a weight of .20, and the next after that a
weight of .10. Note that the weights must sum to 1.00, and
that the heaviest weights are assigned to the most recent
values.
Using forecast information

• Quantitative forecasts (continued)

b. Weighted Moving average: (continued)
Using forecast information

• Quantitative forecasts (continued)

c. Exponential smoothing.

Exponential smoothing is a sophisticated weighted

averaging method that is still relatively easy to use and
understand. Each new forecast is based on the
previous forecast plus a percentage of the difference
between that forecast and the actual value of the series at
that point. That is:
Using forecast information
• Choosing a forecasting technique:

• Many different kinds of forecasting techniques are available,

and no single technique works best in every situation. When
selecting a technique, the manager or analyst must take a
number of factors into consideration.

• The two most important factors are cost and accuracy. How
much money is budgeted for generating the forecast? What are
the possible costs of errors, and what are the benefits that
might accrue from an accurate forecast? Generally speaking,
the higher the accuracy, the higher the cost, so it is important to
weigh cost–accuracy trade-offs carefully. The best forecast is
not necessarily the most accurate or the least costly; rather, it is
some combination of accuracy and cost deemed best by
management.
Using forecast information

• Using forecasting information

• A manager can take a reactive or a proactive approach to

a forecast.

• A reactive approach views forecasts as probable future

demand, and a manager reacts to meet that demand
(e.g., adjusts production rates, inventories, the workforce).

• Conversely, a proactive approach seeks to actively

influence demand (e.g., by means of advertising, pricing,
or product/service changes).